Economists Shouldn’t Rush to Predict Quick Virus Rebound

More than three weeks after the shock from the coronavirus outbreak resulted in an across-the-board sell-off in U.S. stocks and other risk assets, several indexes are back at record levels. This sharp V pattern repeats the experience of two other unanticipated shocks in the last six months: the September attack on Saudi Arabian oil production that took out half of daily output and the January U.S. missile attack that killed a senior Iranian general. It is a pattern that illustrates the now deeply ingrained investor conditioning of “buy the dip” in the fear of missing out on yet another profitable opportunity.

The similarities also go well beyond what has transpired in terms of prices. They also involve the signals sent by central banks. Accompanied by a supportive economic narrative, this has reinforced the notion that this is yet another shock that is temporary, containable and quickly reversible. Yet the markets have yet to internalize an important difference: This shock is taking longer to reverse itself on the ground, and the longer that persists, the deeper and the broader the economic damage.